Investment Selectivity as a Risk-Mitigation Mechanism in Venture Capital Funds Operating in Illiquid Ecosystems

Abstract

Venture capital manages risk through instruments that activate after capital is committed — staged financing, board control, liquidation preferences — each drawing its force from a credible exit. Where the exit is structurally constrained, those instruments lose effect and risk management migrates to the one tool that operates before money changes hands: the choice of which companies to back. This thesis examines how venture investors manage risk under structural illiquidity, taking Morocco as its primary subject, Kenya as a same-region benchmark, and India as a case that moved from lock-in toward a functioning exit channel. The study draws on semi-structured interviews with professionals active in the Moroccan market, one investment committee decision, and documentary evidence from AMIC, AVCA, and Partech. Selection criteria, it finds, do not simply tighten under illiquidity, they recompose around what each investor answers to its capital providers for: the mandate, the stage, promises to limited partners, and the viability of a business in a thin home market. The exit enters each account not as an external constraint but as something constructed at entry from sector narratives, comparable transactions, and buyers inferred from technological fit. Selection is the primary instrument available, yet unable to reach the condition that makes it necessary: the constraint yields only to market-infrastructure change, not to tighter screening.

KeywordsVenture capital · Illiquidity · Investment selection · Risk management · Exit constraints · Morocco · Africa · Emerging markets · Constructed exit · Institutional voids · Sovereign capital